Thursday, September 21, 2017

Norway holds rate but pulls forward date for rate hike

      Norway's central bank left its key policy rate steady at 0.50 percent, as expected, but pulled forward the date for raising its rate on improving economic growth and rising inflation.
      However, Norges Bank (NB) also cautioned there was still a need for expansionary monetary policy as interest rates abroad remain low and capacity utilization in the country's economy is below normal, suggesting inflation will remain below the bank's 2.5 percent target in coming years.
     "Uncertainty surrounding the effects of monetary policy suggests a cautious approach to interest rate setting, also when it becomes appropriate to increase the key policy rate," NB said, adding changes in the outlook implied a somewhat earlier increase in the key rate than earlier projected.
      In its third of four policy reports for 2017, the central bank forecast the key policy rate would be unchanged at the current level this year and in 2018 but then rise to 0.7 percent in 2019, up from 0.1 percent projected in June, and 1.2 percent in 2020, up from 0.2 percent previously forecast.
      Although the output gap - the difference between actual and potential Gross Domestic Product - is forecast to remain negative until 2020, the mainland economy is picking up speed and is now forecast to expand by 2.0 percent this year, up from the June forecast of zero percent growth.
      In the second quarter of this year Norway's GDP grew by only 0.2 percent year-on-year, down from 2.5 percent in the first quarter
      For 2018 and 2019 the economy is seen continuing to expand by 2.0 percent, up from 0.1 percent previously forecast, and then by 2.1 percent in 2010, up from minus 0.1 percent.
      Headline inflation in Norway has been declining since October 2016 and fell to only 1.3 percent in August, the lowest rate since February 2013, partly reflecting the rise in the krona's exchange rate.
      Although the central bank raised its inflation forecast to 1.9 percent this year from a previous 0,1 percent, it is forecast to remain below the bank's target and average 1.3 percent next year, 1.5 percent in 2019 and 1.7 percent in 2020.
      Wages, however, were seen growing faster than previously expected, and forecast to rise 2.4 percent this year, then 2.8 percent next year, 3.3 percent in 2019 and 3.7 percent in 2020.
      Norway's krona, which tends to follow crude oil prices, has been strengthening since June and was trading at 7.82 to the U.S. dollar today, up 10.6 percent this year. However, it still remains more than 20 percent below the level seen in early 2014 before crude oil prices tanked.

      Norges Bank issued the following statement:

"There is a continued need for an expansionary monetary policy. Interest rates abroad are low. Capacity utilisation in the Norwegian economy is below a normal level, and the outlook suggests that inflation will remain below 2.5 percent in the coming years.
Capacity utilisation in the Norwegian economy is on the rise and appears to be somewhat higher than previously assumed. Inflation has declined as expected. Wage growth will likely remain moderate, and the outlook for inflation for the next few years is little changed. Inflation expectations appear to be firmly anchored, and the increase in capacity utilisation suggests that inflation will pick up further out. The changes in the outlook and the balance of risks imply a somewhat earlier increase in the key policy rate than projected in the June Report. Uncertainty surrounding the effects of monetary policy suggests a cautious approach to interest rate setting, also when it becomes appropriate to increase the key policy rate.
"The Executive Board's current assessment of the outlook and balance of risks suggests that the key policy rate will remain at today's level in the period ahead," says Governor Øystein Olsen.
In Monetary Policy Report 3/17, the key policy rate is forecast to be 0.5 percent over the coming year, rising gradually thereafter. The forecast is little changed on the June Report, but is a little higher towards the end of the forecast period."


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